2Q19 core PATAMI of RM11.9m (vs core loss of -RM22.5m in both 1Q19 and 2Q18) brought 1H19 core loss to -RM10.6m (vs core loss of –RM32.1m in 1H18). It was deemed within our/consensus profit estimates of RM19.3m and RM21.3m as we expect stronger 2H19 in view of stronger utilisation rates. No changes to our estimates as we still believe that Velesto is capable of achieving >80% utilisation in FY19 (vs FY18’s 73%). While we reckon that Velesto is a good proxy to recovery of oil prices, we are keeping HOLD as the turnaround story is largely priced in at this juncture. Maintain TP of RM0.31 based on 0.9x FY19 P/B multiple.

Within expectations. 2Q19 revenue of RM157.1m (+24% QoQ, +40% YoY) with core PATAMI of RM11.9m (vs core loss of -RM22.5m in both 1Q19 and 2Q18) brought 1H19 core loss to -RM10.6m (vs core loss of –RM32.1m in 1H18). It was deemed within our/consensus profit estimates of RM19.3m and RM21.3m as we expect stronger 2H19 in view of stronger utilisation rates. No dividend was declared, as expected.

QoQ. Velesto turned the corner with core PATAMI of RM11.9m in 2Q19 from core losses of -RM22.5m in 1Q19 due to improved rig utilisation of 74% (vs 66% in 1Q19) as well as improved day charter rates QoQ (USD71k vs.USD69k). Consequently EBITDA margins improved (49% vs 38% in 1Q19).

YoY. Revenue improved by 40% (to RM157.1m) on the back of stronger rig utilisation of 74% (vs 59% in 2Q18) as well as improved day charter rates of USD71k vs. USD68k. Subsequently, core losses of -RM22.5m turned to core PATAMI of RM11.9m YoY.

YTD. Group revenue improved by 26.1% to RM284.1m as a result of higher rig utilisation (70% vs. 62% YoY) and average charter rates (USD70k vs. USD68k). This subsequently resulted in core losses narrowing from –RM32.1m to -RM10.6m.

Day Charter rates improving. It is understood that rig rates regionally are in the USD80k-USD100k/day range; however Malaysian rig rates have yet to converge at this juncture. Note that Naga4, Naga7 & Naga 8 will come up for renewal throughout 2020 and management is more upbeat on the renewed terms given the rising day charter rates regionally.

Tender activities. Velesto has a tender book of c.RM3.6bn as at July 2019. Collectively Velesto made 34 bids of which 26 are short term (8 long term), whilst the geographic spread is more skewed toward international jobs with 24 of 34 bids are for international jobs, management are more focused on domestic jobs with the view of securing perhaps 1 international job in 2020. As at July, The group has a remaining orderbook of RM1.5bn (RM0.6bn + RM0.9bn option).

Forecast. Unchanged.

Maintain HOLD, TP: RM0.31. Maintain HOLD recommendation with unchanged TP of RM0.31 based on 0.9x FY19 P/B multiple. Velesto remains a good proxy to recovering of oil prices; however at this juncture the share price has priced in the better outlook in 2019.

Source: Hong Leong Investment Bank Research - 3 Sept 2019